SEC panel seeks stock exchange only for the rich

Retail investors would be barred from investing on exchange: panel

RonaldD. Orol

Larry Kofsky/MarketWatch

Panel co-chair Stephen Graham tells MarketWatch the exchange could be organized by the New York Stock Exchange (shown), Nasdaq or another entity with SEC approval.

WASHINGTON (MarketWatch) — A panel that advises the Securities and Exchange Commission on Friday recommended an exclusive exchange be created for micro- and small-capitalization public companies that would only be available for only high-net-worth investors.

The panel, the advisory committee on small and emerging companies, voted to urge the SEC to support the setting up of an exchange for small publicly traded companies that would only be accessible for high-income individuals such as so-called accredited investors, who must have net worths, excluding their homes, of $1 million or more or income of $200,000 or more for at least two years.

Companies listing on an exchange set up for high-net-worth investors may not be required to provide costly prospectuses and other disclosures that are necessary when retail investors are involved. Backers contend that this would drive down costs associated with public offerings and could encourage private companies to take the plunge into becoming almost-public companies. However, retail investor advocates worry that small investors would be blocked from making desired investments.

Stephen Graham, co-chair of the panel, told MarketWatch that it is difficult for small private companies to “cross the line” and become publicly traded because of the costs involved in being publicly traded. He said the SEC would be responsible for determining what kind of disclosure would be required for this group.

“You can drive the disclosure regime and the costs associated with that way down,” Graham said.

The committee, made up of 20 individuals in the small publicly traded business space including angel investors, state regulators and small bank executives, met at the SEC and voted unanimously to make the recommendation.

In fact, Republican commissioner Dan Gallagher told reporters that he wasn’t sure whether such an exchange for small publicly traded companies should only be limited to accredited investors. He said the SEC could tailor disclosure requirements through the agency’s listing standards rules to make it less costly for companies. However, he noted that the a broader exchange for small companies may be better.

“We need to focus on more on these types of markets for the average investor as well as sophisticated investor,“ he told reporters. “There is all this fear that you hear from consumer groups about growth of the private markets, the lack of transparency, so why wouldn’t we then focus on a public market that is truly public.”

Retail investor advocates were less than thrilled at the idea of an exclusive market for high net-worth investors. Charles Rotblut, vice president of the American Association of Individual Investors, told MarketWatch that it’s a question of fairness and access.

“An accountant that does not have the wealth to be an accredited investor, but understands financial statements, would not be allowed to invest,” Rotblut said.

Rotblut added that such an exchange would also raise new risks for high-net worth investors who don’t necessarily have the knowledge, experience or skill to understand the potential investment.

“Having wealth does not mean you have the knowledge to always make intelligent investment decisions,” Rotblut said.

Graham said the exclusive exchange would act as an intermediary stepping stone for small companies to enter the broader markets. The institutions would only trade on the special exchange and companies could later expand their disclosure regime and move to traditional exchanges. He added that the exchange could be set up by Nasdaq
NDAQ, +0.47%
NYSE Euronext
US:NYX
or any other firm, as long as the SEC gave its blessing.

Heath Abshure, commissioner of Arkansas Securities Department, said he worried about what kind of disclosures small public companies trading on the exchange would have to make.

“If we’re not going to require them to disclose very complex compensation structures that have no material effect, fine,” he told MarketWatch. “But if we’re not going to require them to disclose the results of operations on a periodic period, that’s not okay.”

Spokesmen for Nasdaq and NYSE Euronext did not respond to requests for comment.

The panel also recommended that the SEC and participants should explore other alternatives, such as the creation of a private secondary market in the shares of private companies as means of helping to facilitate capital formation for companies that don’t want to float their shares on an exclusive exchange.

Lona Nallengara, acting director of the SEC’s division of corporation finance, told MarketWatch that one other approach to create liquidity could be to have microcap companies pay an exchange or an intermediary market maker to quote their securities.

The number of small capitalization companies is large. According to Grant Thornton, 81% of all listed companies are small cap or smaller, representing cumulatively 6.6% of total listed company value. Read the panel's recommendations.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.